Finance Bill Tracking Service 2010 | Budget 2010

BN39 SHARE INCENTIVE PLANS: ANTI-AVOIDANCE

Who is likely to be affected?

1. Companies and their advisers who use approved Share Incentive Plans (SIPs) for tax avoidance.

General description of the measure

2. Legislation will be introduced in Finance Bill 2010 to combat abuse of the corporation tax (CT) deduction provision, where companies pay money to SIP trustees to buy shares from director-shareholders, but no real value is transferred to employees under the SIP.

3. The measure will also close potential loopholes in the provisions allowing HM Revenue & Customs (HMRC) to withdraw approval of a SIP where alterations to share capital or changes in rights attaching to shares materially affect the value of participants' plan shares.

Operative date

4. The measure will have effect in relation to payments made and alterations to share capital or rights attached to shares taking place on or after 24 March 2010.

Current law and proposed revisions

5. Section 989 of the Corporation Tax Act 2009 (CTA) allows companies (subject to conditions) to obtain a CT deduction where they pay money to SIP trustees to purchase shares from non-corporate shareholders for use in the SIP. The deduction may be withdrawn if insufficient shares are appropriated to employees under the SIP within set time limits; but there is no provision for the deduction to be withheld at the outset in cases where the company made the payment without intending that shares would genuinely be passed to employees under the SIP.

6. This has given rise to avoidance schemes where the company making the payment does so with the main purpose of obtaining the CT deduction. As a result of transactions by the company which alter the share capital or the rights attaching to the shares, employees in the SIP receive few if any shares carrying real value. The transactions have the effect of stripping away the value of shares held in the SIP.

7. The provisions in section 989 of CTA will be amended so that CT deductions will not be allowed where a payment to a SIP trust is made as part of a tax avoidance scheme, where the main purpose or one of the main purposes of the company in making the payment is to obtain a CT deduction. This change will not affect companies that are not involved in avoidance, and which make payments with the purpose of genuinely enabling their employees to obtain shares under the SIP.

8. Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003 allows HMRC to withdraw approval of a SIP where the value of shares held in the SIP trust is materially affected by alterations to the share capital of the company in question or to rights attaching to the shares. This measure makes a limited change, to clarify that approval can be withdrawn even where there are no participants in the SIP, or where no shares have been awarded under it, at the time the alteration takes place.

Further advice

9. If you have any questions about this change, please contact Andrew Ellis on 020 7147 2658 (email: shareschemes@hmrc.gsi.gov.uk). Information about Budget measures is available on the HMRC website at www.hmrc.gov.uk